We Need to Talk...........
With the release of the FMA’s report on policy replacement, reactions have been many and varied. There have been calls for government intervention, investigations into non-adviser channel practices, and focus given to the methods of gathering new business for other non-life risk products in the market. So let’s drill down and put some perspective on the issue.
The FMA made it clear that they were of the view that inappropriate replacement – so-called churn – had potentially negative consequences for consumers and that the activity levels in life risk insurance distribution, being dominated by advisers who, with 40% share are the largest single channel, would be the focus of their investigation.
Now, it’s true that there are other channels that would merit investigation, but the opportunity to examine the FMA findings more closely should not be passed up by those intent upon establishing the actual extent of the issue.
Paying attention to the vagaries of those other channels should be deferred.
They will keep.
In the meantime there are aspects of the report that, in my view, exonerate the vast majority of financial advisers, and provide a huge opportunity to eliminate suspect practices by a simple but comprehensive solution.
So first, some facts and figures from the FMA report might help in providing a platform for further discussions
The 45 advisers identified as having higher replacement activity – potentially churning – represent 4% of the relevant adviser populatio. These are advisers who replaced more that 20% of the clients’ policies in one year.
There might be good and valid reasons for this, but explanation for this is a reasonable request to make.
But one point to make here, the FMA’s definition of a “high rate of replacement” needs comment.
“At least 12% of an adviser’s policies lapsed, and the adviser writes at least 12% of policies as new business within one year” is cited as the criteria for being considered a ‘high rate’.
This is contentious, as without knowing the reason for lapses, it is presumptive to assume that the rate of new business is directly linked to the rate of lapse, and that all lapses are replaced. Clients die, move away, change adviser, or encounter changed circumstances that initiates lapse, with no adviser input whatsoever – i.e. not all lapses result in replacement.
Correlation is not causation.
What is not in any doubt is that the 45 advisers mentioned on page 12 of the report have some explaining to do, and in that regard, the other 96% are entitled to a ‘please explain’ request.
Put simply, there is a very small number of advisers out of the total population who are indulging in anything remotely like significant churn.
In this regard, NZ has fared infinitely better than the suspect documents produced by ASIC and Trowbridge that formed the basis for the silly situation that prevails across the ditch.
We should be aiming to style our regulatory environment to encourage the 96% to extend their services and their reach to those parts of the community that find it difficult to access advice, or to understand what the insurance deal means.
Nevertheless, as we now have some evidence of the scale of the issue, we can deal with this by insisting that life offices are not permitted to accept new business papers to replace an existing policy without the signed authority of the client, the adviser, and the company ‘losing’ the business.
In this context, I agree with Naomi Ballantyne – if the life offices cannot agree among themselves to introduce this regulation voluntarily, then the Government should intervene, via whatever means at its disposal.
But, differing from Naomi’s view, I believe the intervention should be at product provider level, not adviser level. As Norm Stacey so eloquently stated – “ Address the drug dealer, not the drug user”.
Some will be aware of an adviser-driven initiative to design and develop an industry-wide form that must be completed before replacement can be processed. This is a very worthwhile proposal that doesn’t require statutory impost – providing all life companies agree to it.
Writing a ‘report’ – as is required in South Africa, I understand, seems cumbersome and unnecessary, but a simple submission with the rationale included and signatures from all parties attached appears to be more reasonable.
Yes, I know FSC suggested a common business replacement form a few years ago, and this didn’t fly.
But this is now, times have changed, and as it emanates from the adviser sector itself, I believe there is a much better chance of this being universally acceptable.
If government intervention to enforce this procedure within the product provider community is unavailable, then I suggest those life companies declining to participate and comply are asked to explain their reluctance.
So overall, I am more supportive of the general thrust of this report and definitely supportive of the clean bill of health accorded to the vast majority of financial advisers who behave appropriately and provide proper service for clients.
I suggest we embark on a debate on how we can deal to the tiny percentage of advisers who are denigrating the industry by their inappropriate practices once and for all, and leave honest advisers free and clear to get on with business.
We need to talk......